How the US Government turned the American Dream into a Nightmare.

Dec. 6, 2010 6:57 PM ET

While no single person or President was to blame for the real estate bubble and the ensuing financial crisis, the U.S. Government is to blame (in my opinion) for the real estate bubble. In an effort to make home ownership affordable to everyone, the US Government has in many ways, enabled and created policies that directly created and supported a bubble. Of course, many individuals and companies share responsibility in this, but the government provided the framework that made it so banks and home buyers would be left out of if they did not participate. Here some of the primary reasons:

1. We have government sponsored and guaranteed loans from Fannie and Freddie which allowed home buyers nationwide to buy property with little or no money down. Many buyers were able to put 3% down which is not even enough equity to pay a standard 6% sales commission in the event the property was sold.

2. The government encouraged and inflated demand for homes by giving homeowners a mortgage interest deduction. Other countries that do not offer this tax break do not have the housing problems we are faced with now.

3. The government also enabled and inflated home prices with artificially low interest rates starting in 2001. These artificially low rates combined with government guaranteed home loans were the fuel for the housing bubble. Responsible people who saved, and retirees, saw their income from CD's and savings accounts evaporate with these low rates.

4. Finally, the government gives an additional massive incentive to promote home buying and financial speculation in property by allowing homeowners to make up to $500,000 in gains on the sale of their home TAX FREE! Single owners can keep up to $250,000 in profits on the sale of their home and married couples can keep $500,000.

With all these programs, incentives and other offers to make home ownership "affordable", the government, over time, did just the opposite, and ended up making home ownership unattainable for many people towards the end of the bubble. There is simply too much government encouragement to buy housing with all these programs. Other countries that did not have all of these programs (like Canada) have not suffered as much and have a very strong banking system because of it. Canada also has a high rate of home ownership even though the government policy in Canada has not tried to entice the population into homeownership.

If there is any lesson to be learned in this, it is that the government needs to stop making loan guarantees to people who have little or no equity in the transaction, and to people who cannot truly afford to buy the house. If you can only put down 3% you really can't afford the loan. The minimum down payment should be AT LEAST enough to cover a standard real estate commission of 6% in case the house needs to be sold by the homeowner or the bank in the event of foreclosure. It is no surprise that so many are walking away from their mortgages because they never really "owned" the house or even a material percentage of it.

I am amazed that with the massive financial reform bill brought forth from the Obama Administration, Americans are now protected from something as mundane as certain bank fees, but ABSOLUTELY NOTHING was done to reform Fannie and Freddie. High credit card rates and checking account fees did not cause the financial system to nearly collapse, nor did it cause massive unemployment across the US. The government induced housing bubble and low money down loans made possible by Fannie and Freddie are what caused the bubble and ensuing pain to millions of Americans. The fact that a true plan to reform Fannie and Freddie has not been implemented tells me that our politicians are more interested in wallpapering over America's issues with short term gimmicks that might be nothing more than a ploy to keep themselves in office. Meanwhile, America's long term future remains at risk. We have seen that we will not build a strong foundation for the future if our economy is based on no money down and 3% down loans.

When you see the disastrous results of government programs in our housing markets it is no surprise that most Americans are against Obamacare. In private business, a failed system is quickly exposed and destroyed through closure or bankruptcy of that business. Unfortunately with the huge ability for the government to keep borrowing, government backed programs like Fannie, Freddie, the postal system, and Social Security can run massive deficits until they risk causing our entire system and currency to collapse. As some have said, if you think healthcare is expensive now just wait until it is "free" under Obamacare. I am certain that there will be seriously negative, unintended consequences in the Government's plan to provide healthcare to everyone, just as there was when they tried to make home ownership "affordable" for everyone.

The US is going to have to accept some tough medicine and the sooner we do it, the better off we will all be. At this point, the government can't just remove one or all of these programs easily but the 3% down or less loans should be phased out over time. The government needs to allow free markets to work so that real jobs are created, real prices are paid for homes, with a real interest rate by home buyers who have a real down payment. Let's hope that our government gets out of the business of manipulating and distorting free markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.